Canada’s benchmark Standard & Poor’s/TSX index is forecast
to advance to 12,843 by the end of 2013, according to the
average estimate of seven strategists surveyed by Bloomberg this
month. That would be a gain of 5.9 percent since the end of June
and 2 percent from current levels. Strategists project the
Standard & Poor’s 500 Index to close the year at 1,677, slightly
below yesterday’s close of 1,689.47.

The S&P/TSX rose 0.1 percent to 12,605.51 at 9:37 a.m. in
Toronto today, headed for a two-week high. The S&P 500 gained
0.2 percent to 1,692.43.

“From a value perspective, a lot of bad news has been
reflected in a lot of stocks and sectors in the Canadian
market,” Michael O’Brien, a fund manager with TD Asset
Management Inc. in Toronto, said by phone on Aug. 9. The firm
oversees C$216 billion ($209 billion). “The banks and oil
sector, it’s early days but they’re closer to the end of the
process of working through people’s worst fears.”

Canadian stocks fell 2.5 percent in the first half of the
year, compared with a 13 percent gain for the S&P 500, the
largest half-year performance gap between the two indexes since
1998. The country’s top companies -- from Royal Bank of Canada (RY)
to Barrick Gold Corp. (ABX) -- were hit by concern the country’s
housing market was poised for a hard landing and by plunging
gold prices. Oil stocks such as Suncor in the S&P/TSX fell to a
five-month low in April amid discounts on the nation’s crude to
world oil markets.

Home Buying

Fueled by slumping commodity prices, stocks underperformed
even as Canada’s broader economy grew at par with the U.S. The
nation’s economy is forecast to expand by 1.7 percent this year,
compared with a 1.6 percent pace in the U.S., according to
surveys of economists by Bloomberg.

While the S&P/TSX banks index fell as much as 7.7 percent
between February and June amid data showing a slowing domestic
housing market, stocks steadied this spring.

The total value of purchases in six major Canadian real
estate markets rose 30 percent in July compared with the same
month a year earlier, according to data compiled by Bloomberg
News from regional real estate boards. Housing starts increased
11.9 percent on average over the past three months compared with
levels recorded at the start of the year.

“People have been worried about consumer indebtedness and
the housing market,” said O’Brien. “Only way you can grow out
of that is every month goes by when bad things don’t happen, an
accumulation of little positives that turn the tide of how
people perceive the sector.”

Oil Discount

The banks index rose 6.5 percent since touching a 2013 low
on June 20.

Global crude prices have been gaining since April and
trading above $100 a barrel since last month, as improving U.S.
economic data buoy the outlook for global demand.

Canadian oil stocks have also been aided by the narrowing
discount on Canada’s heavy oil grade, Western Canadian Select,
in part on optimism that pipeline bottlenecks are easing.
Western Canadian Select traded $22.75 below U.S. West Texas
Intermediate oil yesterday, from a record $42.50 below WTI
prices on Dec. 14.

“We’re not out of the woods yet but we’re edging towards
greater comfort that if one specific pipeline isn’t a sure
thing, people will find creative ways around it,” O’Brien said.

Energy East

TransCanada Corp., Canada’s second largest pipeline company
by market value, said Aug. 1 it plans to go ahead with a C$12
billion pipeline that will ship oil from Western Canada to the
nation’s Atlantic Coast. The Energy East project would have a
capacity of 1.1 million barrels a day and be in service by the
end of 2017 for deliveries to Quebec and to New Brunswick in
2018, the Calgary-based company said.

The announcement comes as TransCanada’s Keystone XL
pipeline from Alberta to the U.S. Gulf Coast remains in
regulatory limbo as the U.S. government weighs approval.

“There’s certainly an opportunity for the TSX to
outperform here,” said Huen, who helps manage C$220 million at
Red Sky Capital, citing Suncor, Canadian Natural Resources Ltd. (CNQ)
and Bellatrix Exploration Ltd. (BXE) as stocks that may rise. “If oil
prices remain stable at a high level, at some point people have
to recognize these stocks are cheap.”

Huen said Canada’s underperformance has prompted his fund
to consider adding the country’s stocks.

China Slows

“We’re looking more in Canada because it’s underperformed
so much so we might reweight our portfolio out of the U.S. a bit
and back into Canada a bit more,” Huen said.

Canada’s benchmark index still may be on pace for one of
its worst performances against the S&P 500 since the 1990s.
Based on the average forecast of strategists, Canada’s index is
due to rise 3.3 percent this year versus a 18 percent gain for
the S&P 500. That would be the biggest performance gap since
1998.

Canadian mining companies such as Barrick Gold, which has
plunged 46 percent this year, and Teck Resources Ltd., which has
lost 22 percent, have lead declines amid falling metals prices.
An economic slowdown in China, the world’s largest consumer of
raw materials, has caused a bear market in commodities from
copper to silver. China’s gross domestic product is projected by
economists to rise 7.5 percent in 2013 and in 2014, the lowest
annual gain since the Chinese economy grew 3.8 percent in 1990,
data compiled by Bloomberg show.

Still Hurdles

Concerns about consumer debt and housing, a weak outlook
for gold producers and “volatile” oil prices prompted Shailesh Kshatriya, a Toronto-based senior investment analyst at Russell
Investments Group, to cut his year-end forecast for the index.

“As these are the three dominant sectors in the index, we
are cautious on prospects for the TSX,” Kshatriya, whose 2013
estimate for the index is the lowest among the strategists
surveyed, said in an Aug. 2 note. He predicts the index will end
the year at 12,400.

There have also been fresh blows to the market. Telephone
stocks including Rogers Communications Inc. (RCI/B), which have plunged
since June amid speculation Verizon Communications Inc. will
enter Canada’s telecommunications market.

Potash Plunge

The latest setback, just as the market rose 7 percent from
its 2013 low at the end of June, came two weeks ago when
Russia’s OAO Uralkali announced it would quit its marketing
venture with a competitor and start selling potash at market
prices. Shares of Potash Corp. of Saskatchewan Inc., the largest
North American producer of fertilizer that had gained as much as
11 percent this year, have dropped 18 percent since.

Fund managers that are underinvested in Canada may be quick
to return if evidence mounts that China’s economy has begun to
stabilize and Canada’s commodity-heavy market becomes more
attractive, Huen said.

“People are short, and a lot of funds are underweight, so
just to get to a market weighting there will be a substantial
amount of buying,” he said.